Carbon Drops to Two-Week Low as Weak Power Price Saps Demand

European Union carbon permits for December dropped the most in three weeks as record-low power prices in Germany reduced demand for emission allowances.

The benchmark carbon contract fell as much as 4 percent to 4.12 euros ($5.49) a metric ton on ICE Futures Europe exchange, and traded at 4.13 euros at 12:47 p.m. in London. The contract is heading for its first monthly decline since April after dropping 1.7 percent this month.

Solar and wind generation in Germany jumped 80 percent over the past three years, flooding the grid with cheap, emission-free power as the region’s sluggish economic expansion curbs electricity use. Carbon permits can track power prices, which include the cost of emissions allowances.

“We forecast negative power demand across Europe, on a combination of lackluster economic growth, ongoing de-industrialization and energy efficiency,” Patrick Hummel, an analyst at UBS AG in Zurich, said today in an e-mailed note.

Carbon permits fell yesterday for the first time in twelve days, reversing some of this month’s gains stemming from the prospect of a reduced supply of allowances in August. The EU, Germany and the U.K. are cutting auction volumes by 56 percent next month compared with July to reflect reduced trading in Europe’s traditional summer holiday season.

Europe’s carbon trading system imposes emissions caps on about 12,000 power plants and factories, which must surrender tradable allowances to cover their discharges of carbon dioxide or pay fines.

German 2014 electricity declined as much as 1.1 percent to 36.55 euros a megawatt-hour, the lowest since the contract began trading in January 2010, according to broker data compiled by Bloomberg.

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